Fitch Ratings-Barcelona-21 March 2019: Fitch Ratings has upgraded Hellenic Bank Public Company Limited's (HB) Long-Term Issuer Default Rating (IDR) to 'B+' from 'B' and Viability Rating (VR) to 'b+' from 'b'. The Outlook on the Long-Term IDR is Stable. A full list of rating actions is at the end of this rating action commentary

The upgrade follows the completion of the acquisition of certain good assets and liabilities of Cyprus Cooperative Bank Ltd (CCB) and a EUR150 million capital increase. Under the final terms of the acquisition, HB took on board total assets of EUR9.3 billion comprising mainly loans (EUR4 billion net), Cypriot government bonds (EUR4.1 billion) and cash (EUR1 billion), as well as customer deposits of EUR8.8 billion.

KEY RATING DRIVERS IDRS AND VR The ratings of HB reflect its strengthened franchise and market position in Cyprus following the acquisition of CCB, which together with a capital increase, have led to an improved overall financial profile. In particular, the bank's asset quality metrics have improved, albeit remaining weak by international standards, and longer-term profitability prospects are now better. The latter is helped by HB's larger retail business and increased pricing power as well as potential for cost and revenue synergies. The ratings also reflect still high capital encumbrance by unreserved problem loans and significant execution risks related to the integration of a balance sheet that is roughly 1.5x HB's pre-acquisition size.

The acquisition of CCB has strengthened HB's retail franchise as it has enlarged its market shares in performing loans and deposits to over 20% and over 30%, respectively, and shifted the bank's business mix towards retail customers as opposed to the more corporate and SME focused franchise that HB had preacquisition. We believe that this will improve HB's pricing power and would be positive for the bank's profitability over the longer term. In the shorter term, HB is already benefiting from a downward repricing of the acquired deposit base.

Given that CCB's acquired assets had comparatively much better asset quality indicators, HB's nonperforming exposure (NPEs as defined by the European Banking Authority) ratio declined to 26% at endSeptember 2018 from 53% at end-2017, which nevertheless remained high by international standards. The ratio takes into account an asset protection scheme (APS) against NPEs and higher-risk performing loans acquired from CCB (EUR2.3 billion of net loans in total, or over half of the acquired book). The APS is ultimately backed by the Republic of Cyprus (BBB-/Stable), whereby HB will be protected against 90% of losses on the covered loan portfolio.

HB's stock of NPEs is slowly decreasing, due mainly to write-offs and debt-to-asset swaps. The NPE coverage ratio of around 54% at end-September 2018 (close to 66% considering the APS) compares well with that of peers facing similar asset quality problems but exposes HB to collateral valuation.

The bank's other earning assets include a large placement with the ECB (EUR3.3 billion at end-September 2018 or around 20% of total assets). The bank is also highly exposed to Cypriot government bonds (nearly 30% of total assets and 5.7x equity at end-September 2018), although about a third of the bonds will mature by end-2019 and a fifth in 2020.

3/21/2019 [ Press Release ] Fitch Upgrades Hellenic Bank to 'B+'; Outlook Stable
https://www.fitchratings.com/site/pr/10066984 2/5
The acquisition has been accompanied by a EUR150 million capital increase (about a quarter of HB's total equity pre-acquisition). This, combined with a badwill of EUR298 million generated from the acquisition, has protected HB's capital ratios. We estimate that the fully-loaded common equity (CET1) ratio (including IFRS9 impact taken upfront and the capital increase) would be 17.6%. This figure is higher than the known regulatory Supervisory Review and Evaluation Process Requirement, which at present is 11.7% to be achieved by 2022.

However, in our assessment of capitalisation we take into account HB's high capital encumbrance from unreserved NPEs and foreclosed assets. Including the capital increase, the latter represented 1.6x fullyloaded CET1 at end-September 2018 (vs. 2.1x at end-2017), or 1.1x when excluding 90% of the NPEs guaranteed by APS. This indicates that solvency remains vulnerable to moderate asset quality shocks and volatility of property market prices. We expect capital encumbrance to remain high in the absence of large NPE sales. In addition, the bank's capacity to generate capital internally remains weak, making capital ratios vulnerable to potential losses.

HB is mostly deposit-funded. Its funding improved following the CCB acquisition due to the large amount of CCB's resident deposits on-boarded in September 2018. Post-acquisition, the gross loans/deposits ratio for HB fell to about 55%, from about 70% at end-2017. The quality of the deposit base also improved as the share of domestic retail deposits increased while that of more confidence-sensitive non-resident deposits decreased to around 20% (from around 40% at end-June 2018). Liquidity remains sound given that 20% of total assets are in the form of cash and central bank placements, while the large Cypriot government bond portfolio is now ECB-eligible following the recent sovereign upgrade to investment grade.

HB will be challenged to integrate CCB's assets by end-2019 as planned. Execution risks are high given the volume of assets and workforce acquired and the difference in corporate culture of the two banks. Execution will also heavily depend on the health of the operating environment in Cyprus, which is improving overall but remains challenging in light of weak asset quality and high private sector debt.

SUPPORT RATING AND SUPPORT RATING FLOOR HB's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' reflect Fitch's belief that senior creditors of the bank can no longer rely on receiving full extraordinary support from the sovereign in the event that the bank becomes non-viable. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for resolving banks that is likely to require senior creditors to participate in losses, instead of, or ahead of, a bank receiving sovereign support.

RATING SENSITIVITIES IDRS AND VR Rating upside could arise if HB's capitalisation materially improves, in particular its capital encumbered by unreserved problem assets. Improvement in the latter will require a large decline in HB's stock of problem assets. A smooth and timely integration of CCB as planned and improved earnings from its banking business would also be rating-positive.

A negative asset quality shock, lack of further credible reduction of problem assets, higher- than-expected execution risks and costs from integrating CCB or a material weakening of profitability would be ratingnegative.

SUPPORT RATING AND SUPPORT RATING FLOOR Fitch sees limited upside for the bank's Support Rating and Support Rating Floor. This is due to the presence of a resolution scheme with bail-in tools that have already been implemented, the authorities' limited capacity to provide future support, but also in light of a clear intention to reduce implicit state support for financial institutions in the EU.

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